Good day, and welcome to the Sonida Senior Living Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. All statements today, which are not historical facts, may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and the company expressly disclaims any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of these factors that could cause actual results to differ are detailed in the earnings release the company issued earlier today as well as the reports the company files with the SEC from time to time, including the risk factors contained in the annual report on 10-K and quarterly reports on Form 10-Q. Please see today's press release for the full safe harbor statement, which may be found at www.sonidaseniorliving.com/investorrelations, and was furnished in an 8-K filing this morning. Also, please note that during this call, the company will present non-GAAP financial measures. For reconciliations of each non-GAAP measure from the most comparable GAAP measure, please also see today's press release. At this time, I'd like to turn the call over to Sonida Senior Living President and Chief Executive Officer, Brandon Ribar.

Thank you, Doug. Good afternoon, and welcome to our third quarter 2022 earnings call. I'm joined this afternoon by Kevin Detz, our Chief Financial Officer. We are changing our approach to our earnings call starting this quarter, and we'll be referencing our publicly available third quarter investor presentation as we discuss our strategic priorities, operating results for the quarter and ongoing performance expectations. You can find our latest presentation at sonidaseniorliving.com in the Investor Relations section, if you would like to follow along. I'll open my comments by, once again, thanking our incredible team members who provide care and services throughout each of the communities we operate. While we have seen improvement in the overall health landscape with the reduced severity of COVID, the operating environment continues to require dedicated, compassionate and innovative lead teams at the local level. Stability in the caregiver and resident services roles in our communities remains fundamental to our operating approach. It's our belief that strength and stability in local and regional teams will define successful senior living operators during this recovery cycle and beyond, and have crafted our go-forward strategy with that premise as the foundation. On Slide 4 of the presentation, we have highlighted a few of our recent accomplishments, beginning on the people front. Leadership retention has never been stronger with only 14 open positions across more than 330 local and regional leadership roles. Coupled with recent alignment changes, I'm confident we have the leadership strength to deliver on our key growth initiatives moving forward. I'm also pleased with the early returns on capital investments within our portfolio this year, and look forward to completion of our community refresh projects by early next year. These projects have delivered significant occupancy and margin recovery in recent months and represent a key component of…

Thanks, Brandon. I'll be picking back up on Slide 5 for this following along in the deck. Despite a continued challenging operating environment, the company realized a sixth straight quarter of both occupancy and revenue growth. With a strong foundation of continually improving revenues, we were able to increased our operational focus on more sophisticated labor management practices, in addition to the company's recently implemented rate initiatives. This is particularly relevant for one-third of our portfolio, which is enjoying occupancy above 94% and a stabilized in-place workforce. We are also encouraged to see the continued accretive impact from both recently and soon-to-be completed renovation projects, which includes our repositioned Magnolia Trails communities. Diving into the margin headwinds a little deeper, contract labor played a significant role and flat quarter-over-quarter operating margin with a $400,000 increase from the previous quarter. The quarterly increase was largely driven by 10 communities, which have struggled as a result of acute local community factors, including a nursing shortage in several of our Ohio communities and local wage wars in a few limited communities. We believe that our operational leaders have mitigated these factors with targeted action plans and are pleased with the October trends. We expect a material decrease in Q4, assuming curve trending continues. On a macro basis, though average wages continue to increase during the quarter, the percentage increase is flattening relative to the prior 12 months experience. Also, net hires increased 7.9% and 3.6% since year-end and Q2, respectively. Finally, our number of open community leadership positions decreased from 33 associates to 14 associates during the quarter. We believe these trends are all strong indicators of community workforce stability and will allow us to greatly reduce our reliance on contract labor for quarters to come. In addition to the impact on labor…

Thanks, Kevin. Let's spend a few minutes revisiting the primary growth opportunities in the fourth quarter and 2023. First and foremost, we remain focused on achieving the upside performance potential within our organic portfolio and our improved occupancy levels. On the expansion front, we see two primary opportunities for growth in 2023. We are currently evaluating strategic management arrangements with institutional real estate owners for acquisition portfolios. Sonida's interest and ability to invest alongside our ownership partners, in addition to our track record of improving challenged assets, have generated consistent interest on this front. Finally, the prolonged operating challenges of the senior living operating environment, coupled with rising financing costs, will likely produce additional investment opportunities in 2023. We will remain active in evaluating and pursuing accretive investments in our existing and predetermined expansion markets. Turning to Slide 13, I'll conclude today's presentation by introducing our strategic pillars: team, value and operational excellence. We believe best-in-class execution in these areas is key to delivering continued improvement in the business. Emphasizing these three areas creates a differentiated experience for our residents, families and team members, and will deliver strong operating results within current and future Sonida communities. Doug, please open the line for additional questions.

[Operator Instructions] Our first question comes from the line of Steven Valiquette with Barclays. Please proceed with your question.

Great, thanks. Good morning, guys. Thanks for taking the question. I guess as far as the in-place resident rates for 2023, I didn't hear any sort of quantification of the expected rate. But I guess I'm just curious if you are able to quantify what the rates would be? But also should we expect it to accelerate versus the trend in '22? And I guess the other question that's kind of intertwined with that is how should we think about that in the context of how much your OpEx will grow year-over-year? Do you expect the REVPOR to outpace the operating expense per occupied room as far as another source of margin expansion over and above the occupancy gains? So we'll start with that. Thanks.

Yes. Thank you, Steve. I would say that we have seen ongoing increases throughout this year, if you just look between Q1, two and three in our in-place rent increases at the resident level. As a reminder, we do our increases on the resident's anniversary date. So it's not a onetime. And we have seen those rates increasing from -- in the 4% range in the first quarter to now in the high 5s and low 6s as we reach the end of the third quarter. So we will continue to push forward on that. We believe that what we've done from an investment perspective, both in the resident programming as well as the physical plant improvements, does justify the higher in-place rent increases over and beyond what we're hearing just in terms of inflation across the entire economy. So we would expect that those increases will be higher in 2023. And we also -- our goal, given what Kevin talked about, the opportunity to manage operating expenses at the -- especially on the labor front, to remain below what we're shooting for, for the in-place and overall market rates on the top line in order to generate our margin improvement in 2023.

Okay. Got it. Okay. And then Slide 6 is useful as far as just being able to show some of the operating leverage and some of the various components. On the contract labor piece you have there, what is the raw dollar amount of just annualized contract labor cost across the community portfolio right now, just to give us some context around that every $1 million reduction? But what's the baseline raw dollar amount opportunity roughly just to give us a sense?

Yes. So it's the $7.5 million in the top left corner, and that is simply Q3 annualized, multiplied by 4. And so we use that same number in the table on the bottom right to show how that number sensitizes over varying levels of contract labor dollar decrease.

Okay. That is the baseline. Got it. Okay. So a quick question. You alluded to the more sophisticated labor management practices. Is there a chance you could just provide just a little bit more color on some of the framework around that, just so we can all better understand what goes into that? That would be helpful. Thanks.

Yes, I'd say there's two major components to it. And this is -- this goes beyond just the basic blocking and tackling of the positive net hires that Kevin referenced that we've seen throughout the last couple of quarters that really provides stability in the overall workforce. One is sharing of staff in the markets where we have significant density. We have begun doing that in the later part of this year, and are seeing benefits from avoiding the more premium cost of overtime and third-party contract labor utilization. So we would expect to further expand that in our portfolio. And then the other component is the use of flexible and part-time labor in order to really ensure, again, that we're optimized for the services that our residents need and not just thinking about our labor as a fully fixed component of the P&L. And then I'd also say that as we have achieved the occupancy levels that we're at pre-pandemic, we now have the opportunity to see greater flow through without the need to add additional labor hours because we've reached kind of just below that 85% mark that, ultimately, gives you a lot more operating flexibility in running the business without adding labor.

Okay. Got it. Okay. Maybe a final quick question, as far as any sort of a formal 2023 guidance, are you in a position now with the company and a decent amount of stabilization post the worst of the pandemic to potentially give more formal guidance for 2023 on the next earnings call? Or is that still that you're kind of just living quarter-by-quarter as far as some of the trends within the company? Just curious to get your thoughts on that. That will be the final question.

Yes, I'd say that we would like to be in a position to do that. At this point in time, we're just looking at kind of quarter-over-quarter trends. And assuming that the environment begins to stabilize a bit more in 2023, then the company would be in a position to get back to providing guidance. I think we're still in an environment where there's a fair number of moving pieces. But our goal would be to get there next year. And I'll just continue providing the framework, similar to what Kevin provided around the levers to increasing margins and how we're doing on each of those fronts going forward.

Okay, excellent. Okay, that's it for me. Thanks.

Thank you, Steven.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you, Doug. This concludes today's conference. Thank you all for participating, and we wish everyone a happy and healthy holiday season. Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.